There are several known mechanisms for a donor to donate a life insurance policy to a non-profit organization. One mechanism is for the donor to name the non-profit as a beneficiary on the policy. In this scenario, the non-profit organization will receive the death benefit of the donated life insurance policy when the donor dies, but the donor must continue to make the premium payments due under the donated life insurance policy, which are not tax deductible. The proceeds of the policy remain in the donor's taxable estate with an offsetting estate tax charitable deduction. Another option is for the donor to assign an existing life insurance policy to the non-profit organization and then make deductible cash gifts to the non-profit organization, which the non-profit can earmark for the policy premiums. In this scenario, the donor is able to claim an income tax deduction of either the tax basis or the fair market value of the policy (whichever is less) for the year of the deduction. Yet another option, permissible under the laws of some states, is for the donor to donate money to the non-profit organization and have the non-profit organization purchase the life insurance policy on the donor's life. In this scenario, the donation to the non-profit organization is tax deductible and the charity makes the premium payments.
Many non-profit organizations, however, do not solicit donations of life insurance policies from donors. There are several reasons for this including: (i) the ongoing premiums to keep the policy in force require additional cash contributions; (ii) the premiums paid by the non-profit organization reduce operating income needed for fund services provided by the non-profit; (iii) there is a moral hazard when the non-profit benefits from the death of a donor; (iv) the non-profit must wait until the donor dies to benefit from the donation; and (v) the donor would be better off economically to surrender the policy and make a cash donation to the non-profit organization.